FEATURE-British island tax havens seek eastern promise

* Tougher regulations force tax havens to eye Asian clients

* Chinese wary of Channel Island financial products

* Non-islanders pay double for Guernsey homes
By Chris Vellacott

ST HELIER/ST PETER PORT, March 31 (BestGrowthStock) – The rocky
islands that lie off France’s northern shores are angling for
the new rich of Asia, as clampdowns on offshore tax havens and
tougher regulation threaten their traditional sources of income.

Jersey and its Channel Island neighbour Guernsey, which are
British, have since the 1960s thrived off financial services
sold to wealthy people attracted by low, or no, tax rates and
high levels of banking secrecy.

Aside from its French street names, Jersey’s capital St
Helier resembles a well-to-do English suburb, with the island’s
inhabitants earning an average annual salary of 31,000 pounds
($46,250), compared with around 26,000 on the British mainland.

The jobs advertised in the windows of employment agencies —
Senior Private Banker, Japanese Speaking Trust Administrator —
speak volumes about the source of the islands’ relative wealth.

But the finance industry, still reeling from the global
banking crisis, is facing a challenge.

Bank deposits were down 25 percent in Guernsey and 20
percent in Jersey last year, while the value of investment funds
in Guernsey was down 8 percent and more than 4 percent lower in
Jersey.

At the same time, an international crackdown on tax
avoidance through offshore banking, attacks on banking secrecy
and proposed European laws on alternative investment funds are
forcing the islands to look elsewhere for future prosperity.

“Historically, we’ve just sat back and all the business has
come to us,” said Peter Niven, head of Guernsey Finance, a
publicly funded body set up to promote the island’s finance
industry internationally.

“It’s a different dynamic now. We have to be out there
pleading our case,” he said.

EYEING THE EAST

One serious worry is the threat to a burgeoning alternative
private equity and hedge fund sector from proposed European
Union restrictions.

The EU directive on Alternative Investment Fund Managers
could exclude funds in the Channel islands, which are outside
the union, from selling into Europe.

This could be a blow to private equity groups such as Terra
Firma, based in Guernsey and run by Guy Hands who recently
joined a growing colony of British tax exiles living on the
island.

Both Jersey and Guernsey are responding by seeking new
business in the fast-growing economies of Asia.

But the push to market the financial services of two micro
states to the east is proving tough. Channel Island specialities
such as trusts — assets held for protection by a separate legal
entity — are difficult to sell to nations like the Chinese.

“Trusts are based on a fairly esoteric branch of British
law. You have to question how comfortable a first generation
Beijing entrepreneur will be with the idea of handing legal
title of his assets to a foreigner on an island in the Channel,”
said Catherine Tillotson, head of research at Scorpio
Partnership, a wealth management consultancy.

Alan Chick, a Guernsey trust professional, agrees.

“It’s very difficult to persuade the Chinese to actually
part with their funds…. The Chinese don’t understand (the
trust) principle,” said Chick, chairman of Guernsey-based
Richmond Fiduciary Group in a phone interview from Hong Kong.

TAX FLIGHT

Another possible growth area is to persuade more fund
managers to relocate to the islands where their funds are
registered, to escape higher UK taxes.

While the top tax rate in the UK is about to rise to 50
percent, income tax on rich migrants to Jersey who qualify for
residency through a tough vetting process is levied at 20
percent on the first 1 million pounds of earnings, 10 percent on
the next 500,000 pounds and 1 percent on the rest. Guernsey
taxes income at a flat rate of 20 percent. Neither island levies
inheritance or capital gains tax.

The tax benefits need to be impressive, as in Guernsey,
non-natives are limited to purchasing property from a pool of
1700 homes designated “open market” and set aside for outsiders,
costing at least twice as much as “local” housing.

“It’s difficult to find your dream home on the open market,”
said Matthew Henry of Guernsey estate agents Swoffers. He
expects open market prices to rise further and reports a growing
number of enquiries from disgruntled UK taxpayers.

Guy Hands, who set up home on the island last year, bought
Ocean House — newly built, equipped with the latest in
electronic gadgetry and with a sea view — marketed at 8 million
pounds, equal to the most expensive home ever sold here.

In Jersey, a small but growing left-wing political movement
says the islands’ natives see too little of the success of
financial services and is calling for higher taxes on the
industry. “Finance has to pay its way,” said Geoff Southern, a
deputy in the Jersey parliament.

But opponents say islands such as Jersey, only 45 square
miles in size, have few alternatives.

“We used to be a good tourist centre but fun is cheaper
elsewhere now. We don’t grow bananas, we can’t build a car
plant,… so you have to look around for something high value
and low footprint,” said Martin de Forest Brown, director of
international finance for the Jersey government.

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(Editing by Erica Billingham)

($1=.6702 Pound)

(For the Hedge Hub blog: http://blogs.reuters.com/hedgehub)
(For Global Investing: http://blogs.reuters.com/globalinvesting)

FEATURE-British island tax havens seek eastern promise